South Africans change jobs on average 7 times in the working phase of their lives and 95 percent end up without sufficient funds when they retire. The main reason is that they cash in their pension funds instead of preserving them every time they move jobs.
Every time you cash in your pension fund you blow a huge whole in your provisions towards your financial freedom in the future. Financial freedom takes place when your investments can provide you with a sustainable income for the rest of your life. Your pension is the most important contribution to this as it is probably the biggest investment you’ll make over the longest period of time.
Cashing in your fund has dire consequences that you should be well aware of:
It costs you more than you realise.
Assuming you save with 30 years to retirement and you cash in after the first 10 years. The monthly amount needed to catch up to the same value at retirement is 3 times. If you cash in after 20 years, the amount needed to catch up is 10 times. You also give up tax payable to SARS which if left in your fund boosts the compounding effect on your money. The bigger the amount the bigger the compound over time.
Cost of living
If you cancel your pension to pay off debt then you just are kicking the can down the road. Having too much debt in the first place is a result of you living beyond your means. Cashing in your pension is effectively turning off your income at retirement. If you cannot afford your lifestyle now whilst you are earning a salary you certainly won’t afford to live when you retire. You have to bite the bullet and pay off your debts with the income you earn after savings. It’s the only way to arrive at financial freedom into the future.
Retirement funds are inalienable. Which means your creditors cannot touch the money. This is a useful consideration for those wanting to go into business for themselves and intending to cash in their pension fund as an investment into their business. You would do well to use the banks money instead of yours. You get the best of both worlds. You retirement funding stays on track and if the business goes bust then you still have your funds for the future.
It stands to reason that cashing in your pension fund is not the first thing you do when you leave your job. On the contrary it should be a measure of last resort.